1 Unless otherwise indicated, all subsequent section

references are to the Internal Revenue Code in effect for 1998,

the taxable year in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

T.C. Summary Opinion 2002-152

UNITED STATES TAX COURT

SANFORD M. AND SALLY KIRSHENBAUM, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10498-00S. Filed November 25, 2002.

Sanford M. Kirshenbaum, pro se.

John Aletta, for respondent.

ARMEN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1 The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.
- 2 -

2 Petitioner Sally Kirshenbaum did not appear at trial and

did not execute the stipulation of facts. Accordingly, the Court

will dismiss this action as to her. Rule 123(b). However,

decision will be entered against petitioner Sally Kirshenbaum

consistent with the decision entered against petitioner Sanford

M. Kirshenbaum as to the deficiency in tax and the accuracyrelated penalty.

Respondent determined a deficiency in petitioners’ Federal

income tax for the taxable year 1998 in the amount of $12,338 and

an accuracy-related penalty under section 6662(a) in the amount

of $2,468.

After dismissal of petitioner Sally Kirshenbaum (Mrs.

Kirshenbaum),2 the issues for decision are as follows:

(1) Whether petitioner Sanford M. Kirshenbaum (petitioner)

received a taxable distribution of $49,997.15 from his Individual

Retirement Account (IRA). We hold that he did.

(2) Whether petitioner received taxable Social Security

benefits of $12,475. We hold that he did.

(3) Whether petitioner is entitled to IRA contribution

deductions of $4,000. We hold that he is not.

(4) Whether petitioner is liable for an accuracy-related

penalty under section 6662(a) due to a substantial understatement

of income tax. We hold that he is.

An adjustment to the amount of petitioner’s itemized

deductions is a purely mechanical matter, the resolution of which

is dependent on our disposition of the disputed issues.
- 3 -

Background

Some of the facts have been stipulated, and they are so

found. Petitioners resided in Cranston, Rhode Island, at the

time that their petition was filed with the Court.

A. Petitioner and His Background

Petitioner was born on January 3, 1934, and he turned 64 in

1998.

Petitioner obtained a law degree from Boston University Law

School and also obtained a Masters of Law in Taxation in 1960

from the same university. From 1961 through 1965, petitioner

worked as an attorney in the Collection Litigation Division for

the Office of Chief Counsel in Boston, Massachusetts. 

Thereafter, petitioner became a sole practitioner practicing

general law in the State of Rhode Island.

In 1980, petitioner was diagnosed with chronic depression

for which he received medical treatment. Petitioner’s medical

condition adversely affected his professional responsibilities

and, therefore, the Rhode Island Supreme Court placed petitioner

on inactive status by order dated September 17, 1992, due to his

“incapacity to continue to practice law”. See Iddings v.

McBurney, 657 A.2d 550, 552 (R.I. 1995).

Thereafter, petitioner was unable to continue in the

practice of law. As a result, petitioner began receiving

payments from the Social Security Administration in 1993, which
- 4 -

3 “Section 8” is a reference to sec. 8 of the United States

Housing Authority Act of 1937, ch. 896, 80 Stat. 888, as amended

by the Housing and Community Development Act of 1974, Pub. L. 93-

383, sec. 201(a), 88 Stat. 662, which is codified as 42 U.S.C.

sec. 1437f (2000). Generally, “Section 8” refers to assisted

public housing.

continued through the taxable year in issue.

B. Petitioner’s Investment Strategy

Petitioner has maintained several IRAs with institutions

such as Fidelity Investments. As relevant herein, in 1997

petitioner became dissatisfied with the 8-percent return on his

IRA deposits with Fidelity Investments and, therefore, petitioner

orchestrated an arrangement between himself and Marlene Hope,

Inc. “to get out of Fidelity” in order to increase his investment

return. At trial, petitioner described his investment strategy

as follows:

Years back I had been doing some real estate, buying

and selling and mortgaging. I figured that’s the only

place I can get a job and go back to work. * * *

I came across what I thought was a good deal, a single

family house costing $52,450, and I found a tenant, a

Section 8[3] tenant, who needed five bedrooms. She

would gladly occupy the house, providing she got

approval from the Section 8 people in Providence. This

went through, and ultimately I bought the house for

$52,250. I gave a $2,600 deposit, and the balance of

$50,000 or thereabouts was to come from Fidelity.

I spoke to Fidelity about withdrawing this money. They

said as long as it doesn’t come into your hands you

could roll it over. I didn’t want to pay taxes on some

$50,000 in the state I was in then; have to pay taxes

on it and then not have it for the future. I relied on

them. The deal went through.
- 5 -

4 We note that MHI’s business address and telephone number

is the same as petitioner’s residential address and telephone

number.

5 On his 1998 Form 1040, petitioner claimed a dependency

exemption for Marlene Hope Kirshenbaum, who was born in 1961 and

resides with him.

* * * The problem was where was I going to put it? I

knew I couldn’t put it in my own hands. I didn’t want

to put it back into a mutual fund which was costing me

money every year for fees and everything else. I

decided I would buy this house and rent it to this

Section 8 woman.

* * * I withdrew * * * $49,997.15 * * * so it went from

Fidelity Insurance to the corporate account of Marlene

Hope, Inc.

* * * * * * *

I never touched any of that money. It never went

through my fingers at all.

1. Marlene Hope, Inc.

Marlene Hope, Inc. (MHI) was created in the 1970s and

subsequently incorporated in the State of Rhode Island as a forprofit corporation.4 Petitioner’s daughter, Marlene Hope

Kirshenbaum5 (petitioner’s daughter), is the president and sole

shareholder of MHI.

MHI is engaged in the business of real estate purchasing,

selling and development, residential real estate management, and

real estate mortgaging. MHI maintains its corporate funds in an

account with First Bank & Trust Co. MHI filed a Form 1120-A,

U.S. Corporation Short-Form Income Tax Return, for the taxable

year 1997 reporting total income of $9,679, total deductions of
- 6 -

6 Petitioner does not suggest that Fidelity Investments

mistakenly issued a Form 1099-R that designated the Fidelity IRA

transfer incorrectly as an IRA distribution.

$9,750.96, and a zero tax liability. However, MHI did not file

an income tax return for the taxable years 1998, 1999, and 2000.

2. The Investment Property

On June 26, 1998, MHI entered into a “Single/Multi Family

Purchase and Sales Agreement” with Marianna Laliberte (seller) to

purchase a one-family cottage at 168 Veazie Street, Providence,

Rhode Island 02908 (Veazie property) for $52,250. MHI placed a

$2,600 deposit towards the purchase price and the parties

scheduled the closing date for July 14, 1998.

Pursuant to the Veazie property purchase agreement,

petitioner directed Fidelity Investments to wire transfer a

portion (i.e., $49,997.15) of one of his IRAs (Fidelity IRA) to

MHI’s corporate bank account at First Bank and Trust Co. 

Fidelity Investments completed this transaction on July 8, 1998. 

Fidelity Investments sent petitioner a 1998 Form 1099-R,

Distributions From Pensions, Annuities, Retirement or ProfitSharing Plans, IRAs, Insurance Contracts, etc., that reported a

gross distribution of $49,997.15 and a taxable amount of

$49,997.15.6

On July 14, 1998, MHI used petitioner’s Fidelity IRA

distribution to pay the Veazie property purchase price balance of

$49,650. The seller conveyed title to the Veazie property to
- 7 -

7 The same Section 8 tenant has occupied the Veazie

property since MHI purchased it in 1998.

8 The phrase “Veazie property-IRA arrangement” and its

derivatives are intended only for narrative convenience to

describe the form of the disputed transaction and does not

connote the existence of an IRA for Federal income tax purposes.

MHI. MHI maintains the Veazie property as residential rental

property for assisted public housing.7 The local Housing

Authority pays MHI a monthly rent of $800 (housing payment). The

tenant also reimburses MHI directly for utility expenses at $300

per month (plus any excess amount).

3. Petitioner’s Veazie Property-IRA Arrangement

At trial, petitioner described his Veazie property-IRA

arrangement8 as follows:

PETITIONER: * * * [The housing payment] was all

designated as income from the Section 8 housing. * * *

[The housing payment] was designated as an IRA in my

account.

THE COURT: * * * How were you benefitting from

this then?

PETITIONER: I wasn’t.

* * * * * * *

THE COURT: Well, isn’t an eight percent return

better than no return at all? It sounds like you made

a gift to your daughter or this corporation?

PETITIONER: No, no, no. It’s designated as a

corporation that that money is mine eventually. * * *

THE COURT: But you’re telling us that this

arrangement was designed for your ultimate income

security?
- 8 -

9 Petitioner corroborates this description of the Veazie

property-IRA arrangement in his letter to the Internal Revenue

Service dated May 23, 2000, which stated, in part, as follows:

I was not pleased with the return I was getting from

Fidelity. On the Veazie Street investment, with a

purchase price of $52,250 invested, I, with the rental

income, am making over 18% per year in interest, and

have a good opportunity for capital gains when the

property is sold. This certainly is a lot better than

what I was getting at Fidelity. This whole transaction

is recorded in the corporate records as an IRA

investment from me.

The $2,252.85 difference between the purchase price of

$52,250.00 and the $49,997.15 transfer from Fidelity is

(continued...)

PETITIONER: That was my IRA, designated as my IRA.

THE COURT: Okay. Now at some point or other

presumably you would have need for your IRA, correct?

PETITIONER: * * * Instead of drawing it out from

Fidelity, I’m drawing it out from MHI.

* * * * * * *

PETITIONER: * * * in addition to the increase in

money received because of the rent from Fidelity if I

was making eight percent, I’m making ten or 12 here,

plus there’s a good share that when that property is

sold there will be a capital appreciation at least of

$10,000, so that was a good investment. 

* * * * * * *

PETITIONER: * * * All I know is that it’s [the

agreement between petitioner and MHI] designated in the

corporate files and on that file that it’s my IRA.

* * * * * * *

PETITIONER: * * * We don’t have a written

agreement. If I set up something like this, she would

say okay, you’re the father. You do it. But, she has

no legal obligation to do anything that I say.[9]
- 9 -

9(...continued)

an additional IRA investment from me for the year 1998.

10 At the time of trial, Mrs. Kirshenbaum was 64 years old. 

She has a Masters degree in education and works as a full-time

speech pathologist for the Pawtucket public school system.

C. Petitioner’s Form 1040

Petitioner and Mrs. Kirshenbaum filed a joint Form 1040,

U.S. Individual Income Tax Return, for 1998. Petitioner listed

his occupation as retired and Mrs. Kirshenbaum listed her

occupation as therapist.10

On the Form 1040, petitioner reported the following items:

Line 7. Wages, salaries, tips, etc. $45,504.70

Line 8a. Taxable interest 328.71

Line 10. Taxable refunds * * * 573.35

Line 13. Capital gain or (loss) (3,000.00)

Line 15a. Total IRA distributions [1]$49,917.15

Line 15b. Taxable amount 0

Line 17. Rental real estate * * * (2,774.20)

Line 20a. Social security benefits [2]14,676.00

Line 20b. Taxable amount 0

Line 21. Other income 200.00

Line 22. Add * * * lines 7 through

 21 * * * total income 40,832.56

Line 23. IRA deduction 4,000.00

Line 28. Self-employed health insurance

 deduction 4,776.70

Line 32. Add lines 23 through 31a 8,776.70

Line 33. Subtract line 32 from

 line 22 * * * adjusted gross income 32,055.86

Line 36. * * * itemized deductions * * * 30,458.37

Line 37. Subtract line 36 from line * * * [33] 1,597.49

Line 38. * * * total number of exemptions * * * 10,800.00

Line 39. Taxable income 0

Line 56. Total tax 0

1 Petitioner handwrote the word “Rollover” next to the amount of

$49,917.15.

2 Petitioner handwrote the word “Disability” next to the amount of

$14,676.
- 10 -

11 ERS stands for “Employee Retirement System”.

Petitioner attached to the Form 1040 a Form W-2, Wage and

Tax Statement, from the Pawtucket Public School System (Pawtucket

School) disclosing the payment of wages to Mrs. Kirshenbaum in

the amount of $45,504.70 during 1998. The Form W-2 indicated

that Mrs. Kirshenbaum contributed to an “ERS”11 and that she was

an active participant in a qualified retirement plan.

D. Respondent’s Deficiency Notice

In the notice of deficiency, respondent determined that

petitioner received a taxable IRA distribution of $49,997.15 on

the basis that petitioner did not roll over his IRA distribution. 

Respondent also determined that petitioner received taxable

Social Security benefits of $12,475, which was not disability

income. In addition, respondent determined that both petitioner

and Mrs. Kirshenbaum were not entitled to IRA contribution

deductions because they did not substantiate their IRA

deductions. Finally, respondent determined that petitioners are

liable for an accuracy-related penalty due to a substantial

understatement of income tax.

Discussion

In general, the determinations of the Commissioner in a

notice of deficiency are presumed correct, and the burden is on

the taxpayer to show that the determinations are incorrect. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Under
- 11 -

12 Sec. 7491(a)(1) is applicable to court proceedings

arising in connection with examinations commencing after July 22,

1998. See Internal Revenue Service Restructuring and Reform Act

of 1998, Pub. L. 105-206, sec. 3001(a), (c)(1), 112 Stat. 685,

726, 727.

13 We assume, arguendo, that the Veazie property-IRA

arrangement is not a prohibited transaction under sec. 4975(c)

despite its specious characteristics. See sec. 408(e).

section 7491(a)(1), however, the burden of proof shifts to the

Commissioner if, inter alia, the taxpayer first introduces

credible evidence with respect to any factual issue relevant to

ascertaining the taxpayer’s liability for income tax.12 Higbee

v. Commissioner, 116 T.C. 438, 442 (2001). With respect to a

taxpayer’s liability for any penalty, however, section 7491(c)

places on the Commissioner the burden of production.

A. The IRA Distribution13

Generally, any amount paid or distributed out of an IRA is

includable in the recipient’s gross income as provided in section

72. Sec. 408(d)(1); sec. 1.408-4(a), Income Tax Regs. This rule

does not apply, however, to any amount distributed from an IRA to

the individual for whose benefit the account is maintained if the

entire amount is paid into an IRA for the benefit of such

individual not later than 60 days after the distribution. Sec.

408(d)(3); Schoof v. Commissioner, 110 T.C. 1, 7 (1998); sec.

1.408-4(b)(1), Income Tax Regs.

Moreover, Rev. Rul. 78-406, 1978-2 C.B. 157, provides that a

transfer of a participant’s IRA funds directly from one trustee
- 12 -

14 We note that, although entitled to consideration,

revenue rulings are not precedent. Dixon v. United States, 381

U.S. 68, 73 (1965).

bank to another trustee bank is not a rollover contribution

because no such funds were paid or distributed to the participant

and such funds are not within the direct control and use of the

participant.14 See Crow v. Commissioner, T.C. Memo. 2002-178;

Martin v. Commissioner, T.C. Memo. 1992-331, affd. without

published opinion 987 F.2d 770 (5th Cir. 1993). The revenue

ruling further states: “This conclusion would apply whether the

bank trustee initiates or the IRA participant directs the

transfer of funds.” Rev. Rul. 78-406, 1978-2 C.B. at 157-158. 

In other words, the revenue ruling suggests that a trustee-totrustee transfer is tax free to the IRA owner without the need

for the transfer to qualify as a rollover contribution.

As relevant to the present case, an IRA is a trust created

or organized in the United States for the exclusive benefit of an

individual, but only if the written governing instrument creating

the trust meets certain statutory requirements. Sec. 408(a);

sec. 1.408-2, Income Tax Regs.; see Cobb v. Commissioner, 77 T.C.

1096, 1099 (1981), affd. 680 F.2d 1388 (5th Cir. 1982). Section

1.408-2(b), Income Tax Regs., specifically provides, in part,

that the instrument creating the trust must be in writing. See

Phelan v. United States, Civil Action No. 83-1997-Z (D.C. Mass.

1984) (deposit of funds in bank not sufficient to constitute an
- 13 -

15 Sec. 408(a)(2) provides: “The trustee is a bank (as

defined in subsection (n)) or such other person who demonstrates

to the satisfaction of the Secretary that the manner in which

such other person will administer the trust will be consistent

with the requirements of this section.”

IRA because bank’s acknowledgment did not meet the statutory

requirements of sec. 408).

In the petition, petitioner states that the IRA distribution

is not taxable because “the taxpayers’ demonstrated that they

intended to hold and administer the property acquired by the

rollover in such a manner as to comply with * * * [section

408(a)(2)] to the best of their ability.”15 At trial, petitioner

adamantly asserted that his Fidelity IRA was transferred directly

to his Veazie property-IRA via a trustee-to-trustee transfer and,

therefore, that the transfer was not taxable. We need not, and

do not, make a determination whether petitioner’s transaction was

either a rollover contribution or a trustee-to-trustee transfer

because we conclude that petitioner’s Veazie property-IRA is not

a valid IRA within the meaning of section 408(a).

In the present case, petitioner directed that his Fidelity

IRA distribution be transferred to his Veazie property-IRA. The

record is replete with petitioner’s conclusory and self-serving

testimony regarding the purported validity of his Veazie

property-IRA. However, petitioner candidly admitted at trial

that no such written agreement regarding his Veazie property-IRA

exists, but that such a designation exists in MHI’s corporate
- 14 -

16 We do not regard petitioner’s statements regarding the

Veazie property-IRA as credible evidence within the meaning of

sec. 7491(a)(1). See Tokarski v. Commissioner, 87 T.C. 74, 77

(1986); see also Sykes v. Commissioner, T.C. Memo 2001-169. 

Accordingly, we decide the issue before us without regard to the

general burden-shifting rule of sec. 7491(a)(1).

files. Petitioner’s purported designation, however, was not

buttressed by any written documentation. Thus, the lack of a

written governing instrument creating petitioner’s purported

Veazie property-IRA is fatal to his contention that he

established an IRA consistent with section 408(a)(2).16 The

statute and regulations are clear that a written governing

instrument is required to establish an IRA and, therefore,

without a written instrument, petitioner’s purported Veazie

property-IRA must fail to qualify as an IRA pursuant to section

408(a).

In view of the foregoing, we hold that petitioner received a

taxable IRA distribution of $49,997.15. Therefore, we sustain

respondent’s determination on this issue.

B. Social Security Benefits

Section 86 provides for the taxability of Social Security

benefits pursuant to a statutory formula. For tax purposes,

Social Security disability benefits are treated in the same

manner as other Social Security benefits. Sec. 86(d)(1); Thomas

v. Commissioner, T.C. Memo. 2001-120. Thus, if a taxpayer’s

modified adjusted gross income (MAGI) plus one-half of the
- 15 -

17 Our decision on this issue does not depend on which

party has the burden of proof. We note in passing, however, that

petitioner does not argue that sec. 7491(a) places the burden of

proof on the Commissioner here.

taxpayer’s Social Security benefits exceeds a certain base amount

or an adjusted base amount, then a portion of the taxpayer’s

Social Security benefits is includable in gross income and

subject to Federal income tax. Sec. 86(a) through (d). The

includable portion, never exceeding 85 percent, varies according

to a formula set forth in section 86(a). As relevant in the

present case for a joint return, the base amount is $32,000 and

the adjusted base amount is $44,000. Sec. 86(c)(1)(B) and

(2)(B).

Petitioner contends that the payments he received from the

Social Security Administration were nontaxable disability

benefits. On the other hand, respondent contends in the notice

of deficiency that “We have no indication that the $14,676 was

disability income from Social Security.” We, however, need not

decide whether petitioner’s Social Security payments are properly

characterized as disability benefits.17 Assuming arguendo that

petitioner in fact received Social Security disability benefits,

our analysis of whether such payments are includable in

petitioner’s gross income remains unchanged. As stated above,

Social Security disability benefits are treated the same as other

Social Security benefits. Sec. 86(d)(1); Thomas v. Commissioner,
- 16 -

18 Because petitioner has not established that he fully

complied with the substantiation requirements of sec.

7491(a)(2)(A), we decide the issue before us without regard to

sec. 7491(a)(1).

19 Sec. 7701(a)(37) defines an individual retirement plan

as an individual retirement account described in sec. 408(a) and

(continued...)

supra.

Accordingly, because petitioner’s MAGI plus one-half of his

benefits exceeds the adjusted base amount, a portion of his

Social Security benefits is taxable. See sec. 86(a)(2), (c)(2). 

Thus, we sustain respondent’s determination on this issue.

C. Petitioner’s IRA Deductions

As a preliminary matter, we note that deductions are

strictly a matter of legislative grace, and a taxpayer bears the

burden of proving his or her entitlement to the claimed

deductions.18 Rule 142(a)(1); see New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering, 290 U.S.

111, 115 (1933); cf. sec. 7491(a)(2). Taxpayers are required to

maintain records sufficient to substantiate their claimed

deductions. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

Generally, a taxpayer is entitled to a deduction for

qualified retirement contributions. Sec. 219(a); sec. 1.219-

1(a), Income Tax Regs. As relevant herein, section 219(e)

defines a qualified retirement contribution as “any amount paid

in cash for the taxable year by or on behalf of an individual to

an individual retirement plan for such individual’s benefit.”19
- 17 -

19(...continued)

as an individual retirement annuity described in sec. 408(b). 

See Cobb v. Commissioner, 77 T.C. 1096, 1099 (1981).

Also as relevant to the present case, the maximum allowable 

deduction in any taxable year for a married individual is $2,000. 

Sec. 219(c). The amount of the deduction, however, may be

limited where the taxpayer or the taxpayer’s spouse was, for any

part of the taxable year, an active participant in a qualified

retirement plan. Sec. 219(g)(1), (5)(A).

Petitioner contends that he and Mrs. Kirshenbaum each

contributed $2,000 to an existing traditional IRA for 1998. 

Petitioner further claims that he is entitled to an IRA deduction

even if Mrs. Kirshenbaum is covered by the Pawtucket School’s

pension plan because Mrs. Kirshenbaum does not have any vested

rights in her pension plan. In addition, petitioner steadfastly

claims that he is entitled to an IRA deduction “whether it’s from

a rollover or from out of pocket.”

However, there is no evidence to support petitioner’s

contention that he or Mrs. Kirshenbaum made qualified retirement

contributions in 1998 other than his unsubstantiated allegations. 

At trial, petitioner testified that he contributed to an existing

IRA, but he could not clearly articulate whether such

contribution was made to Fidelity Investments, another IRA

account, or some other qualified retirement account. Most

importantly, petitioner did not provide any substantiating
- 18 -

20 We hold that respondent satisfied the burden of

production under sec. 7491(a)(1) because the record shows that

petitioner failed to include certain items in income and claimed

deductions to which he was not entitled. Higbee v. Commissioner,

116 T.C. 438, 442 (2001).

records of his purported IRA contribution nor did he demonstrate

that he maintained such records. The same may be said regarding

any IRA that Mrs. Kirshenbaum may have maintained.

We conclude that petitioner failed to substantiate the

making of any qualified IRA contribution pursuant to section 219

and, therefore, is not entitled to IRA contribution deductions. 

Thus, we sustain respondent’s determination on this issue.

D. Accuracy-Related Penalty

As previously mentioned, section 7491(c) places on the

Commissioner the burden of production with respect to a

taxpayer’s liability for any penalty.20 However, the taxpayer

still has the burden of proving that the Commissioner’s

determination of the accuracy-related penalty is erroneous. Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

Welch v. Helvering, 290 U.S. 111, 115 (1933); Higbee v.

Commissioner, 116 T.C. 438, 446-448 (2001); BJR Corp. v.

Commissioner, 67 T.C. 111, 131 (1976); Bebb v. Commissioner, 36

T.C. 170 (1961). Moreover, in evaluating evidence, the Court is

not bound to accept as gospel the unverified and undocumented

testimony of a taxpayer. Tokarski v. Commissioner, 87 T.C. 74,

77 (1986); Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd.
- 19 -

per curiam 540 F.2d 821 (5th Cir. 1976).

As relevant herein, section 6662(a) imposes an accuracyrelated penalty equal to 20-percent of an underpayment that is

due to a substantial understatement of income tax. See sec.

6662(a) and (b)(2). An individual substantially understates his

or her income tax when the reported tax is understated by the

greater of 10-percent of the tax required to be shown on the

return or $5,000. Sec. 6662(d)(1)(A). Tax is not understated to

the extent that the treatment of the item is (1) based on

substantial authority, or (2) relevant facts are adequately

disclosed in the return or in a statement attached to the return

and there is a reasonable basis for the tax treatment of such

item by the taxpayer. Sec. 6662(d)(2)(B).

Moreover, the accuracy-related penalty does not apply with

respect to any portion of an underpayment if it is shown that

there was reasonable cause for such portion and that the taxpayer

acted in good faith with respect to such portion. Sec.

6664(c)(1). The determination of whether a taxpayer acted with

reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most

important factor is the extent of the taxpayer’s effort to assess

the taxpayer’s proper tax liability for such year. Id.

Petitioner reported zero tax on his 1998 return. The amount
- 20 -

required to be shown on the return was $12,338. Therefore,

petitioner understated his income tax in an amount greater than

$5,000 or 10-percent of the tax required to be shown on his

return.

Petitioner did not present any evidence or make any showing

as to why respondent’s penalty determination is in error. 

Petitioner contends that he is not liable for the accuracyrelated penalty because he had a reasonable basis for the tax

items at issue and because he relied on the advice of a

representative of Fidelity Investments. Given petitioner’s legal

education and experience, petitioner did not have a reasonable

basis for the tax items at issue, especially in the absence of

substantiating records. Moreover, petitioner’s purported

reliance on a financial representative was not reasonable nor

prudent. See sec. 1.6662-4(c), Income Tax Regs.

The facts and circumstances of this case support the

imposition of an accuracy-related penalty under section 6662(a)

and (b)(2). Accordingly, we sustain respondent’s determination

on this issue.

E. Conclusion

We have considered all of the other arguments made by the

parties, and, to the extent that we have not specifically

addressed them, we conclude they are without merit.
- 21 -

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Order of Dismissal as to

Sally Kirshenbaum and

decision will be entered

for respondent.